Following New York Fed President William Dudley's call for making mortgage refinancing available to more homeowners, Joseph Tracy and Joshua Wright examined the potential impact of such a move.  Writing at the NY Fed's Liberty Street Economics blog, Tracy and Wright argue that refinancing is not a "zero-sum game."  Rather, they say that, lower interest rates bring about both economic growth and a more stable housing market, inlarge part because of who owns mortgage-backed securities.  Take a look:

Tracy and Wright:

For homeowners with fixed-rate mortgages—the vast majority of U.S. mortgage borrowers—the reduction in monthly payments takes place when the homeowner refinances the existing mortgage into a new mortgage at the lower prevailing mortgage interest rate.

    When borrowers refinance and free up cash to spend, there will be an offset on overall economic activity as mortgage bonds are prepaid and investors in those bonds need to find alternative investments at precisely those times when other bonds are likely to offer a lower yield, reducing the investors’ income.

    But we will argue that the offset is only partial. Why? There are two reasons. First, many mortgage bonds are held by government or foreign investors whose spending on U.S. goods and services does not depend to any significant degree on their income from the mortgage bonds. Moreover, the share of mortgage bonds held by such investors has increased. Second, the remaining, domestically based private investors are likely to cut back their spending much less than the borrowers raise theirs.

    To better understand why the offset is only partial, let’s look at the figures in a bit more detail. As shown in the pie chart below, slightly less than 47 percent of agency mortgage-backed securities (MBS) are held by foreign investors and federal governmental institutions, including government-sponsored enterprises and the Federal Reserve. In these cases, we would not expect any domestic spending offset from a decline in the value of the MBS securities, for the reasons discussed above. An additional 8.3 percent of MBS are held by insurance and pension funds; for these funds, any spending effects are likely to be spread out over a relatively long period of time.

At first glance, this argument may cause some to shake their heads and wonder if we have slipped back into 2006.  Read the full post here and let us know your take.